Why the CBO may not believe all its own deficit projections

The CBO predicts a deficit of $1.5 trillion for 2011, but then steadily falling amounts through 2014. Good news? Not really. The CBO had to make assumptions about US policies its officials seem to have little faith will be implemented.

The Congressional Budget Office issued updated figures today that predict the budget deficit for fiscal year 2011 will be a flaming huge $1.5 trillion. That’s about $414 billion bigger than the CBO last August figured this year’s shortfall would be. And yes, it would be a record in terms of absolute dollar red ink for Uncle Sam.

Things get better in 2012 though, according to the CBO’s new budget and economic outlook. Budget deficits would “drop markedly,” especially if measured as a percentage of national economic output, according to the report.

With the economy recovering and some government spending programs ending, the 2012 shortfall will be $1.1 trillion, representing about 7 percent of US gross domestic product, say the CBO’s budgeteers. In 2013, those figures will be $704 billion and 4.3 percent of GDP, and in 2014 they’ll be $533 billion and 3.1 percent of GDP.

That’s what the CBO predicts, anyway. But here’s the interesting thing: the CBO does not appear to really trust its own deficit projections for 2012 and beyond.

Why is that? Because the CBO can only crunch numbers and make predictions based on existing law. And CBO officials sound as if they do not believe that Congress and the White House will permit a number of scheduled money-saving moves to happen.

The CBO’s new figures “understate the budget deficits that would occur if many policies in place were continued, rather than allowed to expire as scheduled under current law,” writes CBO director Douglas Elmendorfon his blog.

For instance, sharp reductions in Medicare payment rates for physician services are scheduled to kick in at the end of this year. Will they? It’s unlikely – Congress has been postponing these cuts via last-minute so-called “doc fix” bills for years.

Similarly, provisions that limit the reach of the Alternative Minimum Tax are scheduled to expire at the end of 2011. Congress has always shielded middle-class taxpayers from the AMT’s bite in the past.

Then there are the Bush tax cuts, which were extended in last year’s lame duck congressional session per bipartisan agreement. That extension expires in 2013, and the CBO has to do its math on the assumption that the expiration goes through.

If Congress goes ahead and permanently heads off all these project changes “deficits from 2012 through 2021 would average about six percent of GDP, rather than 3.6 percent,” writes Elmendorf.

And what of the deficit beyond this 10-year projection period? There lie monsters, according to the CBO’s outlook. Spending on the government’s major mandatory health programs, such as Medicare and Medicaid, will help drive deficits to peaks beyond our current experience, says the new report.

“To prevent debt from becoming unsupportable, the Congress will have to substantially restrain the growth of spending, raise revenues significantly above their historical share of GDP, or pursue some combination of those two approaches,” writes Elmendorf. “The longer the necessary adjustments are delayed, the greater will be the negative consequences of the mounting debt.”